Selling a Business: Legal and Financial Considerations

Earlier this year, we launched this new section of our blog, meant to let subscribers know what businesses our network is selling and what businesses we have buyers for. It will appear here at the top of each post. If interested in buying or selling, let us know. Feel free to forward the information to anyone you think might like to see it.

LOOKING FOR: Skilled trades (HVAC, electrical, plumbing, etc.), small manufacturing, business services, healthcare. EBITDA: $1 million.  Revenue: $5 million. Location: Eastern U.S.            in**@Wo**********************.com

17 June 2024: Selling a Business: Legal and Financial Considerations

Back in April, we posted on some of the legal issues that buyers must consider when buying a business. That post prompted several readers (and a couple of Members of The Brokers Roundtable℠) to request of suggest that we do something similar from the seller’s perspective.

Of course, there’s no way to cover all the potential legal and financial issues that can arise when selling a business but this post is meant to provide some guidance as to some of the most important elements of selling from the owner’s perspective.

As we’ve written, advised and counseled repeatedly for more than 20 years, it’s extremely important to get the proper talent onboard once selling one’s business begins to become a possibility. And that talent should include the appropriate legal representation and financial advisor(s). But it’s also important that the seller have a basic knowledge of what is likely to transpire over the course of the selling process and a basic understanding not only of what the major categories of concern are but also is capable of understanding the advice and guidance received from the pros.

So, with all that said, let’s dive in.

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The calendar of events scheduled for this month in The Brokers Roundtable℠ is posted in the Announcements space. Don’t miss Office Hours (“Ask Me Anything”), workshops, Live Streams, Thursday Specials and more.

REALTORS: The Announcements space also has news you can use!

If you’re not yet a Member of The Brokers Roundtable℠, you can find out what other benefits Members enjoy – and join us – here. 

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As I’ve written often, selling a business ain’t for sissies. It is a significant, usually once-in-a-lifetime financial transaction that involves navigating a myriad of legal issues to ensure a smooth and legally compliant transfer of ownership. In fact, if you’re a business owner looking to sell your company, understanding these legal and financial considerations is crucial for a successful transaction.

1. Preparation and Valuation:

Before listing a business for sale, thorough preparation is essential. This involves not only getting the financials in order but also ensuring compliance with legal requirements. Valuing the business accurately is crucial, as it forms the basis for negotiations and the sale price.

If the price expected is too high, the business is unlikely to sell. In fact, price expectation is one of the three main reasons businesses don’t sell when they first come to market. But of the price is too low, the seller leaves money on the table.

If the owner is serious about selling, knowing what the business is worth is the critical first step in the process. Hiring professionals such as accountants and business valuators can help in assessing the worth of the business based on factors like assets, liabilities, revenue, profitability, market trends, and future potential.

2. Legal Structure and Entity Considerations:

The legal structure of the business can significantly impact the sale process. Whether the business is a sole proprietorship, partnership, corporation, or LLC, each structure has its own implications for taxes, liabilities, and transferability of ownership. Sellers need to review their organizational documents, such as articles of incorporation, partnership agreements, and operating agreements, to determine any restrictions or approvals required for a sale. It’s essential to ensure that the entity is in good standing with state authorities and that all necessary corporate formalities have been followed.

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Courses! Courses! Courses!

Many of you have asked if our Flagship Course, “Learn How to Value and SUCCESSFULLY Sell Businesses“, could be made available on a module-by-module basis. Instead of enrolling in the complete course, could you enroll only in the module(s) you wanted? We’re happy to report that this is now possible.

We’ve broken our Flagship into six separate modules (or module groups) to give you all the flexibility you need to learn only what you want to learn – and we’ve moved them all over to the new Brokers Academy in The Brokers Roundtable℠ . The Flagship is still available but the modules are now available individually.

You don’t need to be a Member of The Brokers Roundtable℠ to access any of these courses but if you are, you’ll receive a 20% discount on any course you enroll in. If you’re not yet a member of The Brokers Roundtable℠, you can learn more – and get access to all the talent and resources – here. 

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3. Contracts and Agreements:

When selling a business, the process is typically governed by a detailed purchase agreement that outlines the terms and conditions of the transaction. This includes the purchase price, payment terms, allocation of assets and liabilities, representations and warranties made by the seller, and any contingencies or conditions precedent to closing. Negotiating these terms requires careful consideration of tax implications, indemnification provisions, non-compete agreements, and other post-sale obligations. Both parties may also enter into confidentiality agreements during negotiations to protect sensitive business information.

4. Due Diligence:

Due diligence is a critical phase of the sale process where the buyer investigates the business to verify its financial, operational, and legal health. Sellers are typically required to provide extensive documentation, including financial statements, tax returns, customer contracts, employment agreements, leases, intellectual property rights, and pending litigation.

Conducting thorough due diligence helps buyers assess risks and opportunities associated with the acquisition and may uncover issues that require resolution before closing the deal. To avoid any surprises, sellers should perform a due diligence audit prior to bringing their business to market.

5. Regulatory Compliance:

Business sales often involve compliance with various regulatory requirements at the federal, state, and local levels. This may include obtaining licenses, permits, or approvals specific to the industry or jurisdiction. Sellers must ensure that the business complies with employment laws, environmental regulations, zoning ordinances, and any industry-specific regulations. Failing to address regulatory issues can delay the sale process or expose the parties to legal liabilities post-closing.

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Our course, “Learn How to Value and SUCCESSFULLY Sell Businesses“, teaches you how to accurately value and successfully sell businesses.

6. Tax Implications:

The tax consequences of selling a business can be substantial and should be carefully considered during negotiations. Sellers may be subject to capital gains taxes on the sale proceeds, which can vary based on factors such as the length of ownership and the structure of the transaction. Structuring the sale as an asset sale versus a stock sale can have different tax implications for both parties.

In our opinion, business owners are over-taxed at the sale of their business. Having worked hard and sacrificed for many years to build their business, it seems patently unfair that the business owner gets popped for a large chunk of his or her “rewards” for such work and sacrifice. In fact, an American president publicly stated that if you own a business, you didn’t build it – and he actually got elected! 

There are legitimate ways to structure the sale of a business to significantly reduce, if not eliminate, the tax burden. Consulting with tax advisors and accountants early in the process can help minimize tax liabilities and maximize after-tax proceeds from the sale.

7. Employee and Customer Considerations:

A change in ownership can impact employees and customers of the business. Sellers may need to notify employees of the impending sale and comply with labor laws regarding severance pay, employee benefits, and transfer of employment contracts. Make sure you or one of your advisors know the laws in the jurisdiction your business is location.

Maintaining customer relationships during the transition is crucial to preserving goodwill and business continuity. Sellers often include provisions in the purchase agreement regarding employee retention, customer notifications, and confidentiality of sensitive information. And buyers often include provisions in the purchase agreement requiring the seller to act in certain ways to insure a smooth, cohesive transaction. PAY ATTENTION!

8. Post-Sale Obligations and Liabilities:

After the sale is completed, sellers may still have ongoing obligations and potential liabilities. These may include warranties or indemnities provided to the buyer regarding the accuracy of financial statements, absence of undisclosed liabilities, and ownership of intellectual property among other elements. Sellers should negotiate these provisions carefully to limit their exposure and ensure a clear understanding of post-sale responsibilities.

The Bottom Line

When selling a business, the owner is embarking on what is most likely to be the most significant financial event of his or her life. The importance of having the right team of advisors cannot be overstated.

Similarly, understanding how the process is likely to unfold before the starting gun is fired will generally result in a smoother transaction and one that will end successfully. To help, we’ve prepared a six-part series describing the process of selling and posted it in the free area of The Brokers Roundtable℠. Check it out and let me know if you have any questions.

I’d like to hear from you. What topics would you like me to cover? How can we tailor these posts to be more useful to you and your business. Let me know in the comments box, below, or email me at jo*@Wo*******************.com.

If you have any questions or comments on this topic – or any topic related to business – I’d like to hear from you. Put them in the comments box below. Start the conversation and I’ll get back to you with answers or my own comments. If I get enough on one topic, I’ll address them in a future post or podcast.

I’ll be back with you again next Monday. In the meantime, I hope you have a safe and profitable week.

Joe

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NOTE TO READERS: Our “Searching For…” feature has been moved to our online community, The Brokers Roundtable℠. It will appear there exclusively from now on.

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The author is the founder, in 2001, of Worldwide Business Brokers and holds a certification from the International Business Brokers Association (IBBA) as a Certified Business Intermediary (CBI) of which there are fewer than 600 in the world. He can be reached at jo*@Wo*******************.com